Market Organization in Low-Income Countries' Microgrids: Insights from Electricity Demand Elasticity and Game-Theory Optimization. Case Study: Lebanon

Abstract

In Lebanon, the publicly organized electricity grid has struggled for decades to provide a reliable electricity supply and has nearly collapsed. In response, a network of distributed diesel generators has flourished as an alternative to the unreliable central grid. However, electricity prices within these microgrids remain largely unregulated. This study has two main objectives: first, to estimate the electricity demand elasticity of residential consumers using a unique dataset from a Lebanese microgrid in Deir Kanoun al Naher; second, to analyze how the microgrid owner's knowledge of this elasticity affects electricity pricing to maximize profits. We apply an ordinary least squares estimator to determine electricity demand elasticity and a game-theory-based optimization model to derive the microgrid owner's profit-maximizing pricing strategy. The estimated selling price elasticity is -0.48, indicating relatively inelastic demand, in line with values reported for developing countries. Considering the estimated elasticity in the pricing strategy resulting in an increase of 54%, revenues increase by up to 15%, while the share of suppressed demand reaches approximately 25%. Sensitivity analysis suggests that higher price elasticity mitigates excessive pricing strategies. The role of the public grid and solar PV penetration presents a promising direction for future research.